I do think that most readers if given the chance to think for themselves regarding macro-economic policy perform better than the specialists who dominate the Federal Reserve or Treasury Department. It reminds me of how William F. Buckley exclaimed that he’d rather be governed by a random pick of 200 people from the Boston phonebook than Harvard faculty!
When people are given an accurate account of the financial principals that govern the discipline of macro-economics they find themselves powerfully informed to understand much that usually seems quite confusing.
This post will explain how a return to a gold standard will kill the U.S. economy. I’ve written extensively on this blog how to think through our current economic malaise. I would ask that you read previous posts to further grasp how Hayek and others have already given us credible alternatives to turn the American economy around. What’s missing is both political leadership and sound economic thinking!
Our current problem regarding the elimination of paper (fiat) money and replacing it with a gold standard ignores the political reasons for how we arrived at our current juncture. We must start out with a few basic fundamental principals that govern a functioning economy.
The only true foundation for stable money is a stable economy. This means we fix our problem fiscally. This means that money supply growth must be divorced from the opaque derivatives that have dominated Wall Street. Both our liberal model of confiscatory taxation, irresponsible spending and subsidies along with the creation of value exponentially by monolithic TBTF ‘to big to fail’ financial institutions who gamble with paper (fiat) money; all have created our current problem. Money supply must be synchronized with real productivity, not gambling. It is the responsibility of government to maintain a stable currency and manage inflation. These are the original mandates that founded the Federal Reserve. It has completely lost its way in divorcing itself from its original mission.
Why reject the gold standard? Their are two sound reasons why.
The gold supply cannot be controlled as readily as people believe. Any global commodity (think oil) must float in open market. If you remove this from happening, no one has an interest in price discovery!
Secondly, the vast amount of control Americans have over gold is very small compared to the gold supply resting in foreign hands. Expecting the Russians, Chinese or South Africans to modulate their own gold supply to support a stable U.S. dollar is foolish.
Consequently, I support the fiat, paper dollar backed by both sound macro-economic policies and a fiscally restrained Congress. The Federal Board of Governors can easily control fiat money (base money plus credit) far easier than gold supply. Is Ben Bernanke and Timothy Geithner models for sound public macro-economic policy governance? NO. But neither are a bunch of Russian gold miners. A politically informed citizenry can fix our currency problems.
Its simple. A strong growing economy grounded in sound fiscal policies can restore confidence in the currency.