ACRU

Why the Gold Standard Is the Foundation for Restoring Booming Economic Growth

Economics - Money

This column by ACRU General Counsel Peter Ferrara was published on August 1, 2014 on Forbes.com.

This is the third installment in a series on how to restore traditional, American, booming economic growth, and prosperity for all. Previously, I discussed both individual and corporate tax reform, slashing tax rates in return for closing loopholes. Last week, I discussed why deregulation is essential to restoring such booming growth.

This week I discuss why the gold standard is the foundation for restoring booming growth and prosperity for all. Americans today no longer understand what the gold standard means, or involves. That can be ascribed to poor education, and intellectually debased national media, which lack the foundation to even discuss the subject intelligently.

But the U.S. Constitution provides for a gold standard for America, specifying that Congress shall define the dollar as a specific weight of gold, as Lew Lehrman explains in his recent books, The True Gold Standard, and Money, Gold, and History. That American gold standard prevailed from 1792 to 1971, as Steve Forbes also explains in his recent book, Money.

Tying the dollar to gold, which has proved to maintain its value for thousands of years of recorded civilization, meant that the dollar maintained its stable value, without inflation, as well. The U.S. price level was almost exactly the same in 1913, when the Federal Reserve Board was established, as it was in 1792, when Congress passed the Coinage Act defining the value of the dollar under the Constitution. That value of the dollar was the same as well in 1934, when Franklin Roosevelt terminated the original, Constitutional right of every American to exchange every dollar for its defined amount of gold.

But since America abandoned the gold standard in 1971, the purchasing power of the dollar has declined by 85 percent. A dollar saved in 1971 was worth only 15 cents by 2012. While gold cost $20 an ounce in March, 1910, the same as in 1792, by April 15, 2012, it cost $1,658. A dollar, worth one twentieth of an ounce of gold when the Federal Reserve was established in 1913, was worth only 4 cents by 2010.

The original Founding Founders understood basic economics so much better than any Nobel Prize winner, or any of the other 20th Century economic sophists who convinced us to abandon the gold standard that worked so spectacularly for America. When America was on the gold standard, the real rate of economic growth averaged nearly 4% a year. Since then real annual growth has stagnated at about 25% less. Under Obama the Magnificent, real growth has been barely half what it was under the original American gold standard.

At 4% real growth, our economy, incomes and standard of living would double every 17 years. After 34 years, a generation, per capita GDP, which defines the standard of living, would be 8 times larger.

Working People Paid in Gold

On the gold standard, the wages of working people would be paid in gold, as all would enjoy the same right to exchange their dollars for gold. That means their wages would not be depreciated by inflation. They would know that anything they saved would be worth the same any time in the future when they needed it. By contrast, under President Obama, since 2008, oil prices have almost tripled, gasoline prices have doubled, and basic food prices, such as for sugar, corn, soybean and wheat, have almost doubled.

Moreover, the gold standard strongly encourages investment, since investors know the dollars they will be paid back on what they invest will be worth the same as the original dollars they put into the investment. That investment is what creates jobs for working people, as new businesses are created, and current ones are expanded. That investment also increases real wages for working people, as it increases the demand for their labor. Capital investment also increases worker productivity, as workers enjoy new tools and equipment that make them more productive. That results in higher wages, consistent with the higher economic growth.

As a result, the American people would increase their savings and investment under the gold standard. But the gold standard would also draw increased investment in the American economy from the world over, in response to the assured stable value of the dollar. Combining the restored gold standard with the tax reform previously proposed in this series would further increase capital investment in America, both domestic and foreign, in response to the much lower tax rates on savings and investment.

Power to the People

Under the gold standard, working people would control the money supply, not elitist bureaucrats. If the Fed increased the supply of dollars beyond the people’s demand for dollars, people would exchange dollars for gold. The people would consequently stop the Fed before it could create inflation.

But the people could also increase the money supply if needed to support economic growth. Under the gold standard, banks and other financial institutions would be empowered to mint their own gold coins as long as the amount of gold in the coins was correctly denominated. Banks could consequently increase the money supply to meet the demand for business loans or other unsatisfied demand for money. That increased demand for gold would induce mining companies to increase their supply of gold.

But they could not increase the money supply faster than the demand for money. If the people did not want to hold more gold coin, there would be no takers for the newly minted coins.

Contrary to myth, and intellectual confusion, under the gold standard the money supply would not be limited to the government’s holdings or supply of gold. The Fed could increase the supply of dollars to meet the demand for dollars, providing the money needed to service economic growth. As long as the supply did not exceed the demand, there would be no increased draw on the Fed’s holdings of gold due to the increased supply of dollars. So if the economy demanded more money to support the level of economic growth, under the gold standard, there would be no limitation on the Fed supplying it. This is why any country could operate a gold standard on any reserve of gold the government holds to support it. (The government could also print more of its currency to buy more gold in the marketplace if it thought holding more gold was necessary. That is fully consistent with the gold standard as well.).

Reestablishing the Gold Standard

The gold standard could be restored first by legislation simply instructing the Fed to follow a price rule in conducting its monetary policy that would maintain a stable dollar price for gold. If gold’s price was rising, the Fed would then tighten the money supply to stop this budding inflation. If gold’s price was falling, the Fed would increase the money supply to stop that budding deflation. Once the price of gold was thus stabilized for a sufficient period, Congress could then enact legislation exercising its constitutional power to define the dollar as equal to that stabilized value of gold.

If America restored its gold standard, other countries would quickly follow. Otherwise, their economies would fall behind. The Chinese and the Russians could be expected to do the same immediately, especially as the Chinese are already ardently seeking restored stability for the dollar. Indeed, if America does not act, nothing would stop the Chinese from adopting their own gold standard for their currency, with Russia to quickly follow. This very column, in fact, could easily be translated into Chinese.