Jim Grant Joins The Chorus Demanding A Return To The Gold Standard

Tyler Durden's picture

We salute Jim Grant for joining the ever greater chorus demanding a return to the gold standard: "Let the economists gasp: The classical gold standard, the one that was in place from 1880 to 1914, is what the world needs now. In its utility, economy and elegance, there has never been a monetary system like it." And no, as Jim Rickards among others claim, a return to the gold standard would not be deflationary...if gold were to be converted to the USD at between $5,000 and $35,000/oz.

How to Make the Dollar Sound Again, by James Grant

Originally appearing in the New York Times

BY disclosing a plan to conjure $600 billion to support the sagging economy,
the Federal Reserve affirmed the interesting fact that dollars can be
conjured. In the digital age, you don’t even need a printing press.

This was on Nov. 3. A general uproar ensued, with the dollar exchange
rate weakening and the price of gold surging. And when, last Monday, the
president of the World Bank suggested, almost diffidently, that there might be a place for gold in today’s international monetary arrangements, you could hear a pin drop.

Let the economists gasp: The classical gold standard, the one that was
in place from 1880 to 1914, is what the world needs now. In its utility,
economy and elegance, there has never been a monetary system like it.

It was simplicity itself. National currencies were backed by gold. If
you didn’t like the currency you could exchange it for shiny coins
(money was “sound” if it rang when dropped on a counter). Borders were
open and money was footloose. It went where it was treated well. In
gold-standard countries, government budgets were mainly balanced.
Central banks had the single public function of exchanging gold for
paper or paper for gold. The public decided which it wanted.

“You can’t go back,” today’s central bankers are wont to protest, before
adding, “And you shouldn’t, anyway.” They seem to forget that we are
forever going back (and forth, too), because nothing about money is
really new. “Quantitative easing,” a k a money-printing, is as old as
the hills. Draftsmen of the United States Constitution,
well recalling the overproduction of the Continental paper dollar,
defined money as “coin.” “To coin money” and “regulate the value
thereof” was a Congressional power they joined in the same
constitutional phrase with that of fixing “the standard of weights and
measures.” For most of the next 200 years, the dollar was, in fact,
defined as a weight of metal. The pure paper era did not begin until
1971.

The Federal Reserve was created in 1913 — by coincidence, the final full
year of the original gold standard. (Less functional variants followed
in the 1920s and ’40s; no longer could just anybody demand gold for
paper, or paper for gold.) At the outset, the Fed was a gold standard
central bank. It could not have conjured money even if it had wanted to,
as the value of the dollar was fixed under law as one 20.67th of an
ounce of gold.

Neither was the Fed concerned with managing the national economy. Fast
forward 65 years or so, to the late 1970s, and the Fed would have been
unrecognizable to the men who voted it into existence. It was now held
responsible for ensuring full employment and stable prices alike.

Today, the Fed’s hundreds of Ph.D.’s conduct research at the frontiers of economic science. “The Two-Period Rational Inattention Model: Accelerations and Analyses” is the title of one of the treatises the monetary scholars have recently produced. “Continuous Time Extraction of a Nonstationary Signal with Illustrations in Continuous Low-pass and Band-pass Filtering”
is another. You can’t blame the learned authors for preferring the life
they lead to the careers they would have under a true-blue gold
standard. Rather than writing monographs for each other, they would be
standing behind a counter exchanging paper for gold and vice versa.

If only they gave it some thought, though, the economists — nothing if
not smart — would fairly jump at the chance for counter duty. For a
convertible currency is a sophisticated, self-contained information
system. By choosing to hold it, or instead the gold that stands behind
it, the people tell the central bank if it has issued too much money or
too little. It’s democracy in money, rather than mandarin rule.

Today, it’s the mandarins at the Federal Reserve who decide what
interest rate to impose, and what volume of currency to conjure.

The Bank of England once had an unhappy experience with this method of
operation. To fight the Napoleonic wars of the early 19th century,
Britain traded in its gold pound for a scrip, and the bank had to decide
unilaterally how many pounds to print. Lacking the information encased
in the gold standard, it printed too many. A great inflation bubbled.

Later, a parliamentary inquest
determined that no institution should again be entrusted with such
powers as the suspension of gold convertibility had dumped in the lap of
those bank directors. They had meant well enough, the parliamentarians
concluded, but even the most minute knowledge of the British economy,
“combined with the profound science in all the principles of money and
circulation,” would not enable anyone to circulate the exact amount of
money needed for “the wants of trade.”

The same is true now at the Fed. The chairman, Ben Bernanke, and his
minions have taken it upon themselves to decide that a lot more money
should circulate. According to the Consumer Price Index, which is
showing year-over-year gains of less than 1.5 percent, prices are
essentially stable.

...

To reinstitute a modern gold standard today would take time, too. The
United States would first have to call an international monetary
conference. A chastened Ben Bernanke would have to announce that, in
fact, he cannot see into the future and needs the information that the
convertibility feature of a gold dollar would impart.

That humbling chore completed, the delegates could get down to the
technical work of proposing a rate of exchange between gold and the
dollar (probably it would be even higher than the current price of gold,
the better to encourage new exploration and production).

Other countries, thunderstruck, would then have to follow suit. The
main thing, Mr. Bernanke would emphasize, would be to create a monetary
system that synchronizes national economies rather than driving them
apart.

If the classical gold standard in its every Edwardian feature could not,
after all, be teleported into the 21st century, there would be plenty
of scope for adaptation and, perhaps, improvement. Let the author of
“The Two-Period Rational Inattention Model: Accelerations and Analyses”
have a crack at it.

(read the full Op-Ed here)