Gold Standard: America’s Future as Well as its Past?

Photo By Daniel Suchenski

As part of the recent political debate for the presidency as well as the overall party platforms of the Democrats and the Republicans, an idea that has only provoked mild interest since 1984, again saw light. At the Republican National Convention in Florida back in August of 2012, the decision was made to set up a “gold commission” as part of the official platform to examine the feasibility of returning the US to a gold standard, a system by which the US dollar would be fixed to some quantity of gold. The United States, has been off a “gold standard” since 1971 when U.S. President Richard M. Nixon, “facing huge budget and trade deficits, and a plunging dollar – enacted a series of economic moves, including the unilateral cancellation of the direct convertibility of the U.S. dollar into gold”[2] According to a recent CNBC article, the RNC’s recent shift “shows how five years of easy monetary policy — and the efforts of congressman Ron Paul — have made the once-fringe idea of returning to gold-as-money a legitimate part of Republican debate.”[3] Despite its recent resurgence in the media and in the Republican Party, what would a return to the gold standard mean for the country?

Largely absent from public discourse for decades, the last time a return to the gold standard was mentioned in the Republican Party’s platform was back in the 80’s. The Republican platform in 1980 references a “restoration of a dependable monetary standard," while the 1984 platform states that “the gold standard may be a useful mechanism” for national stability.[4] Ron Paul and his supporters in the Republican Party are not the only ones pushing for this idea. Indeed, Marsha Blackburn, a Republican congresswoman from Tennessee and co-chair of the platform committee, said the gold commission was not adopted merely to placate Paul and the delegates that he picked up during his campaign for the party’s nomination. “These were adopted because they are things that Republicans agree on,” Blackburn told the Financial Times. “The House recently passed a bill on this, and this is something that we think needs to be done.”[5] In addition to prominent politicians on Capitol Hill, some in the business community are also taking up the banner. In a recent interview with Steve Forbes, Chairman and Chief Executive Officer of Forbes Media and Editor-in-Chief of Forbes magazine, said “I try to promote free-market economics every chance. In addition to chucking our tax code, one of the key issues in the next few years will be getting this country on a gold standard. That's just beginning but, sadly, I think circumstances are going to propel this happening.”[6] Clearly there is a growing interest in the US to returning to the gold standard. Right? Satyajit Das, a former banker and author of Extreme Money and Traders Guns & Money, states that the revival of interest in gold in general is “underpinned by debate of a return to the gold standard. Advocates as varied as Libertarian US presidential candidate Ron Paul and the Islamic Liberation Party (Hizb ut-Tahrir) have argued that the gold standard is a solution to the deep problems of the global economy.” He goes on to say that “the gold standard, it is argued, would foster economic stability and prosperity, primarily by creating price stability, fixed exchange rates and placing limits on government deficit spending as well as trade imbalances. It will also limit credit driven boom bust cycles through constraints on the supply of money.”[7]

To make some sense of what returning to the gold standard would mean for the country, it's first important to have some background on our current financial system of money referred to as "fiat" currency. Instead of having currency pegged at a fixed rate against a tangible good, i.e. gold, the fiat system is largely influenced by the actions of the government. Since government actions largely determine the value of the currency, these “currencies aren't backed by commodities, but rather by the reputations of their governments.”[8] According to Bruce Watson, writing for DailyFinance.com, the fiat system allows a government to “control the flow of money into the economy. When prices are dropping too fast (think of the housing bubble burst, for example), the government can "print" more money, slightly inflating the currency and steadying prices. Conversely, when prices are rising too rapidly, the government can decrease the flow of money, making the currency slightly more valuable and steadying prices again.” He goes on to state that “in the U.S., the Federal Reserve controls this ebb and flow by regulating banks, adjusting the flow of money into the economy, and lending capital to banks when necessary. Chartered to prevent and temper the sorts of massive financial panics that were once regular occurrences.”[9]

Because a return to the gold standard in the US would significantly limit the government’s ability to use monetary policy to temper highs and lows in the global markets, many opponents of the gold standard argue that the limited “flexibility of governments and central banks in managing economies, restricting the ability to adjust money supply, government budgets and exchange rates”[10] are ample enough reasons to stay with the fiat system. Additionally, a return to the gold standard would “confer a natural financial advantage to countries that produce gold, such as the US, China, Russia, Australia and South Africa.” And that current geopolitical considerations and global competition would make this an unlikely, if not untenable situation.[11]

Paul Krugman, a prominent economist in the US and professor at Princeton University, in an article in the NY Times this summer stated in no uncertain terms that a return to the gold standard is a “very bad, no good, truly awful idea.”[12] To make his point Krugman noted that under a gold regime, the US had financial panics in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.[13] Matthew O'Brien, associate editor at The Atlantic covering business and economics, detailed in a recent article “Why the Gold Standard Is the World's Worst Economic Idea, in 2 Charts” His first chart shows the volatility of the Consumer Price Index (CPI) during June 1919 to March 1933.

The second chart shows the Consumer Price Index (CPI) from 2008 to today.

Based on these charts, it seems that the gold era is characterized by deeper price swings, and more crises. According to O’Brien, the gold standard “should guarantee price stability in the long run, but you know what they say about the long run -- we're all dead. In the short run, prices can change violently under the gold standard, as the balance of trade changes or the physical stock of gold changes. Remember, price stability isn't just about avoiding inflation; it's about avoiding deflation too. The gold standard wasn't good at either -- especially compared to our modern inflation-targeting system.” [14]

So if stability is not a likely goal what is the appeal of a return to the gold standard? For Joe Weisenthal, “It's actually pretty simple. The ability to create fiat money out of thin air is a stealth form of taxation, because the creation of more dollars diminishes the value of those already in existence. Conservatives have a constitutional opposition to taxation, ergo a system of money that makes it hard to create more money is pretty logical.”[15] Add to that the fact that a recent survey conducted at the University of Chicago Booth school of business, concluded that  exactly zero economists (of those surveyed) endorse a return to the gold standard,[16] and that it may be impossible to actually acquire enough gold bullion to once again fix the price of the US dollar, and the reality of the situation starts to sink in.

 Under the gold standard, the government must have enough gold on hand to redeem every single dollar in circulation. According to John Waggoner writing for USA Today, there is 170,000 metric tons of gold in the world. This translates into about “5.5 billion troy ounces. (Troy ounces are 1.1 ounces.) All that gold would be worth roughly $9 trillion at $1,639.10 an ounce. U.S. gross domestic product is about $15 trillion. Even if the U.S. had the entire world supply of gold, the gold standard would run into practical problems” For Waggoner, the only way this deficit could be bridged would be if the “price of gold would have to soar to accommodate U.S. trade in goods and services.”[17]

While the rhetoric and the prominent personality fervor over a return to the gold standard has ignited interest and passion among some in the US. It seems clear that a return to the US dollar being pegged against a commodity is doubtful. Putting aside the challenges of actually acquiring enough bullion to make it possible, there is little evidence to support that a return to the gold standard would actually stabilize the national or international markets. Indeed, a return to the gold standard actually has the ability to further destabilize the American dollar and the world in general. To borrow the concluding remark of Matthew O’Brien from his article, “Whether it's 1896 or 2012, it doesn't make sense to crucify our economy on a cross of gold.”[18]

---

[1] http://www.telegraph.co.uk/finance/personalfinance/investing/gold/8117300/Bring-back-the-gold-standard-says-World-Bank-chief.html

[2] http://etfdailynews.com/2012/11/05/the-secret-return-to-the-gold-standard-gld-iau-sgol-slv/

[3] http://www.cnbc.com/id/48770752/Republicans_Eye_Return_to_Gold_Standard
[4] http://www.cnbc.com/id/48770752/Republicans_Eye_Return_to_Gold_Standard

[5] http://www.cnbc.com/id/48770752/Republicans_Eye_Return_to_Gold_Standard

[6] http://www.rightsidenews.com/2012112517457/editorial/rsn-pick-of-the-day/steve-forbes-on-the-future-of-the-gop-obamas-next-four-years-and-the-advent-of-a-gold-standard.html

[7] http://www.abc.net.au/unleashed/4404080.html

[8] http://www.dailyfinance.com/2012/08/30/gold-standard-return-how-it-affects-you/

[9] http://www.dailyfinance.com/2012/08/30/gold-standard-return-how-it-affects-you/

[10] http://www.abc.net.au/unleashed/4404080.html

[11] Ibid.

[12] http://krugman.blogs.nytimes.com/2012/08/26/golden-instability/

[13] http://www.businessinsider.com/why-conservatives-like-the-gold-standard-2012-8

[14] http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/

[15] http://www.businessinsider.com/why-conservatives-like-the-gold-standard-2012-8

[16] http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_cw1nNUYOXSAKwrq

[17] http://usatoday30.usatoday.com/money/markets/story/2012-04-23/return-to-the-gold-standard/54493710/1

[18] http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/

Gold Standard: America’s Future as Well as its Past?

[1]

As part of the recent political debate for the presidency as well as the overall party platforms of the Democrats and the Republicans, an idea that has only provoked mild interest since 1984, again saw light. At the Republican National Convention in Florida back in August of 2012, the decision was made to set up a “gold commission” as part of the official platform to examine the feasibility of returning the US to a gold standard, a system by which the US dollar would be fixed to some quantity of gold. The United States, has been off a “gold standard” since 1971 when U.S. President Richard M. Nixon, “facing huge budget and trade deficits, and a plunging dollar – enacted a series of economic moves, including the unilateral cancellation of the direct convertibility of the U.S. dollar into gold”[2] According to a recent CNBC article, the RNC’s recent shift “shows how five years of easy monetary policy — and the efforts of congressman Ron Paul — have made the once-fringe idea of returning to gold-as-money a legitimate part of Republican debate.”[3] Despite its recent resurgence in the media and in the Republican Party, what would a return to the gold standard mean for the country?

Largely absent from public discourse for decades, the last time a return to the gold standard was mentioned in the Republican Party’s platform was back in the 80’s. The Republican platform in 1980 references a “restoration of a dependable monetary standard," while the 1984 platform states that “the gold standard may be a useful mechanism” for national stability.[4] Ron Paul and his supporters in the Republican Party are not the only ones pushing for this idea. Indeed, Marsha Blackburn, a Republican congresswoman from Tennessee and co-chair of the platform committee, said the gold commission was not adopted merely to placate Paul and the delegates that he picked up during his campaign for the party’s nomination. “These were adopted because they are things that Republicans agree on,” Blackburn told the Financial Times. “The House recently passed a bill on this, and this is something that we think needs to be done.”[5] In addition to prominent politicians on Capitol Hill, some in the business community are also taking up the banner. In a recent interview with Steve Forbes, Chairman and Chief Executive Officer of Forbes Media and Editor-in-Chief of Forbes magazine, said “I try to promote free-market economics every chance. In addition to chucking our tax code, one of the key issues in the next few years will be getting this country on a gold standard. That's just beginning but, sadly, I think circumstances are going to propel this happening.”[6] Clearly there is a growing interest in the US to returning to the gold standard. Right? Satyajit Das, a former banker and author of Extreme Money and Traders Guns & Money, states that the revival of interest in gold in general is “underpinned by debate of a return to the gold standard. Advocates as varied as Libertarian US presidential candidate Ron Paul and the Islamic Liberation Party (Hizb ut-Tahrir) have argued that the gold standard is a solution to the deep problems of the global economy.” He goes on to say that “the gold standard, it is argued, would foster economic stability and prosperity, primarily by creating price stability, fixed exchange rates and placing limits on government deficit spending as well as trade imbalances. It will also limit credit driven boom bust cycles through constraints on the supply of money.”[7]

To make some sense of what returning to the gold standard would mean for the country, it's first important to have some background on our current financial system of money referred to as "fiat" currency. Instead of having currency pegged at a fixed rate against a tangible good, i.e. gold, the fiat system is largely influenced by the actions of the government. Since government actions largely determine the value of the currency, these “currencies aren't backed by commodities, but rather by the reputations of their governments.”[8] According to Bruce Watson, writing for DailyFinance.com, the fiat system allows a government to “control the flow of money into the economy. When prices are dropping too fast (think of the housing bubble burst, for example), the government can "print" more money, slightly inflating the currency and steadying prices. Conversely, when prices are rising too rapidly, the government can decrease the flow of money, making the currency slightly more valuable and steadying prices again.” He goes on to state that “in the U.S., the Federal Reserve controls this ebb and flow by regulating banks, adjusting the flow of money into the economy, and lending capital to banks when necessary. Chartered to prevent and temper the sorts of massive financial panics that were once regular occurrences.”[9]

Because a return to the gold standard in the US would significantly limit the government’s ability to use monetary policy to temper highs and lows in the global markets, many opponents of the gold standard argue that the limited “flexibility of governments and central banks in managing economies, restricting the ability to adjust money supply, government budgets and exchange rates”[10] are ample enough reasons to stay with the fiat system. Additionally, a return to the gold standard would “confer a natural financial advantage to countries that produce gold, such as the US, China, Russia, Australia and South Africa.” And that current geopolitical considerations and global competition would make this an unlikely, if not untenable situation.[11]

Paul Krugman, a prominent economist in the US and professor at Princeton University, in an article in the NY Times this summer stated in no uncertain terms that a return to the gold standard is a “very bad, no good, truly awful idea.”[12] To make his point Krugman noted that under a gold regime, the US had financial panics in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.[13] Matthew O'Brien, associate editor at The Atlantic covering business and economics, detailed in a recent article “Why the Gold Standard Is the World's Worst Economic Idea, in 2 Charts” His first chart shows the volatility of the Consumer Price Index (CPI) during June 1919 to March 1933.

The second chart shows the Consumer Price Index (CPI) from 2008 to today.

Based on these charts, it seems that the gold era is characterized by deeper price swings, and more crises. According to O’Brien, the gold standard “should guarantee price stability in the long run, but you know what they say about the long run -- we're all dead. In the short run, prices can change violently under the gold standard, as the balance of trade changes or the physical stock of gold changes. Remember, price stability isn't just about avoiding inflation; it's about avoiding deflation too. The gold standard wasn't good at either -- especially compared to our modern inflation-targeting system.” [14]

So if stability is not a likely goal what is the appeal of a return to the gold standard? For Joe Weisenthal, “It's actually pretty simple. The ability to create fiat money out of thin air is a stealth form of taxation, because the creation of more dollars diminishes the value of those already in existence. Conservatives have a constitutional opposition to taxation, ergo a system of money that makes it hard to create more money is pretty logical.”[15] Add to that the fact that a recent survey conducted at the University of Chicago Booth school of business, concluded that  exactly zero economists (of those surveyed) endorse a return to the gold standard,[16] and that it may be impossible to actually acquire enough gold bullion to once again fix the price of the US dollar, and the reality of the situation starts to sink in.

 Under the gold standard, the government must have enough gold on hand to redeem every single dollar in circulation. According to John Waggoner writing for USA Today, there is 170,000 metric tons of gold in the world. This translates into about “5.5 billion troy ounces. (Troy ounces are 1.1 ounces.) All that gold would be worth roughly $9 trillion at $1,639.10 an ounce. U.S. gross domestic product is about $15 trillion. Even if the U.S. had the entire world supply of gold, the gold standard would run into practical problems” For Waggoner, the only way this deficit could be bridged would be if the “price of gold would have to soar to accommodate U.S. trade in goods and services.”[17]

While the rhetoric and the prominent personality fervor over a return to the gold standard has ignited interest and passion among some in the US. It seems clear that a return to the US dollar being pegged against a commodity is doubtful. Putting aside the challenges of actually acquiring enough bullion to make it possible, there is little evidence to support that a return to the gold standard would actually stabilize the national or international markets. Indeed, a return to the gold standard actually has the ability to further destabilize the American dollar and the world in general. To borrow the concluding remark of Matthew O’Brien from his article, “Whether it's 1896 or 2012, it doesn't make sense to crucify our economy on a cross of gold.”[18]

---

[1] http://www.telegraph.co.uk/finance/personalfinance/investing/gold/8117300/Bring-back-the-gold-standard-says-World-Bank-chief.html

[2] http://etfdailynews.com/2012/11/05/the-secret-return-to-the-gold-standard-gld-iau-sgol-slv/

[3] http://www.cnbc.com/id/48770752/Republicans_Eye_Return_to_Gold_Standard

[4] http://www.cnbc.com/id/48770752/Republicans_Eye_Return_to_Gold_Standard

[5] http://www.cnbc.com/id/48770752/Republicans_Eye_Return_to_Gold_Standard

[6] http://www.rightsidenews.com/2012112517457/editorial/rsn-pick-of-the-day/steve-forbes-on-the-future-of-the-gop-obamas-next-four-years-and-the-advent-of-a-gold-standard.html

[7] http://www.abc.net.au/unleashed/4404080.html

[8] http://www.dailyfinance.com/2012/08/30/gold-standard-return-how-it-affects-you/

[9] http://www.dailyfinance.com/2012/08/30/gold-standard-return-how-it-affects-you/

[10] http://www.abc.net.au/unleashed/4404080.html

[11] Ibid.

[12] http://krugman.blogs.nytimes.com/2012/08/26/golden-instability/

[13] http://www.businessinsider.com/why-conservatives-like-the-gold-standard-2012-8

[14] http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/

[15] http://www.businessinsider.com/why-conservatives-like-the-gold-standard-2012-8

[16] http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_cw1nNUYOXSAKwrq

[17] http://usatoday30.usatoday.com/money/markets/story/2012-04-23/return-to-the-gold-standard/54493710/1

[18] http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/

A Forgotten Policy Memo For A Forgotten War - 2008

Photo By Daniel Suchenski

Policy Memo: Conditions for Democracy in Afghanistan

By Daniel Suchenski

While America’s war on terror rages in Iraq and occupies most of the United States time, money and effort, it is not the only war America faces. To the East of Iraq lies the larger and equally complicated situation of Afghanistan. Sometimes called the ‘forgotten war,’ the war in Afghanistan faces the same problem of reconstruction and stability. While it has been America’s stated intention to democratize and make Afghanistan free from terrorist elements, establishing democracy is sometimes harder than some would like. The military successes in Afghanistan have demonstrated the awesome technological prowess of the U.S. military, however, as the campaign evolves into a nation-building operation, America has found that our skills in the social and political arena do not match those of our military. It seems clear that given the historical and current situations of Afghanistan, the country is not yet capable or willing to embrace real democracy. It therefore seems clear that the United States should reexamine its long-term commitments to the country and look for more stable yet open minded government that is in time with the desires and needs of the people of Afghanistan.

Historically speaking “Afghanistan has never had ruling elites who sincerely advocated democratic principles.”1 This lack of support from the elites is part of the unsuccessful story of democracy in Afghanistan. Even attempts at parliamentary institutions by Zahir Shah in the 1960’s to “modernize Afghanistan’s educational system and initiate political reforms.”2 Unfortunately the reforms that Zahir implemented “fell far short of real democracy” because ultimate authority still remained in the hands of the king.3 This imbalance of power meant that the Zahirs parlimentary institutions lacked “the decision-making authority of a truly democratic representative legislature.”4 Recently President Karzai and leaders of at least some of the country’s main ethnic groups now support democracy in principle.5 However, “tribal leaders and a large number of local officials in Afghanistan’s provinces remain determined to uphold traditional laws and customs, in contravention of democratic principles and Afghanistan’s new constitutional order.”6

This is not the first time in Afghanistan’s history that tribal leaders and local officials have stringently upheld traditional laws and customs and resisted change. In the early twentieth century Amanullah Khan ascended the throne, a progressive leader Amanullah Khan “gave Afghanistan its first constitution, placing the king under the rule of law and establishing the legal equality of all citizens.”7 Taking his reforms further Amanullah Khan “encouraged Agfhan women to study abroad and participate in public life.”8 The reaction to Amanullah Khan’s social and educational reforms “triggered fierce resistance throughout the socially conservative countryside”9 The resistance against the reforms reached such an extent that Amanullah Khan and his government were unable to suppress the revolt, and forced Amanullah Khan to flee abroad in 1929.10 More than forty years later the resistance to reform from the tribal leaders and local officials that forced

Amanhullah Khan to flee from Afghanistan would once again be tested. A coup lead by a radical faction of Afghanistan’s communist party and based on Soviet-inspired communist principles took control of the country in 1978 and reform was once again on the minds of the ruling elite. Hafizullah Amin, the leader of the coup and head of government began changing Afghanistan so it could more closely resemble that of the Soviet Union. But the “regimes attempts to change long-standing social customs provoked strong opposition from Afghanistan’s tribal leaders and Islamic clerics.”11 The Afghan people’s reluctance to embrace communist doctrine, should not be misconstrued to mean that they therefore more favorable to democratic principles, rather that militia leaders, tribal leaders and local officials are more concerned with wielding their own local power than anything else. This

historical reluctance to change and reform is one of the most principle obstacles that President Karzai’s government faces. Local authorities unwillingness to cede power to the national government in Kabul is proving to be a serious obstacle to the central governments efforts to “extend the authority of the Afghan state’s new institutions over the entire country.”12

Despite all the obstacles President Karzai and his government face toward national unity, Afghanistan is not entirely without a semblance of democratic institutions that could serve as an incubator of state legitimacy and a possible full-fledged democracy. The Loya Jirga was a Pashtun tribal or village council.13 A more “important Grand Council, or Loya Jirga, met in 1747 to choose a new king (shah) for Afghanistan.”14 In the years following this Grand Council, “various Afghan monarchs periodically summoned a Loya Jirga to legitimize their authority or gain advice on important political decisions.”15 In the 1920’s the Loya Jirga became institutionalized as the county’s highest representative body.16 But despite the Loya Jirga’s importance as a ligitimizing device, its democratic authenticity remained limited.”17 In addition to its limited authority, the Loya Jirga was also “rarely inclusive: membership was usually overwhelmingly (and often exclusively) male, and confined mostly to Pashtuns, the country’s largest ethnic group.”18

The U.S. vision for a postwar Afghanistan relies on the familiar recipes of democracy and massive foreign aid. Unfortunately, neither is likely to work effectively. Actually, Afghanistan might be in worse shape than Iraq. The American intervention toppled the Taliban regime, but has left nothing to replace them. In fact the war has returned the country to a medieval state of warlords and fiefdoms; a

situation that resulted in 25 years of factional fighting and civil war.

References:

1 Sodaro, Michael. 2008. Comparative Politics: A Global Introduction. Third Edition. Boston: McGraw Hill. 246. 2 Sodaro, Michael. 2008. Comparative Politics: A Global Introduction. Third Edition. Boston: McGraw Hill., 246. 3 Ibid, 246. 4 Ibid, 246. 5 Ibid, 246.

6 Ibid, 246. 7 Ibid, 243. 8 Ibid, 243. 9 Ibid, 243. 10 Ibid, 243. 11 Ibid, 244. 12 Ibid, 246. 13 Ibid, 246. 14 Ibid, 246. 15 Ibid, 246. 16 Ibid 244. 17 Ibid, 246. 18 Ibid, 246.