Advance Look: What The New Gold Standard Will Look Like

Every country's political system is unique. Just as there are many variations on democracy, there are also various-and-legitimate-types of gold standards. Some like the idea of having 100% gold coverage for currency while others prefer something similar to the classical gold standard of the late 19th century.

Steve Forbes
5/08/2013 @ 11:39AM
Forbes

Just as there are many variations on democracy, there are also various–and legitimate–types of gold standards. The U.S. political system is absolutely unique. Canada’s system is a hybrid of ours and Britain’s. Britain’s is very different from that of France, which, in turn, is very different from Germany’s. And so it goes, all around the democratic world. Yet the bedrock of all of these countries’ systems is consent of the governed.

There have been permutations of the gold standard. Some like the idea of having 100% gold coverage for currency. Others prefer something similar to the classical gold standard of the late 19th century, which was different from the bimetallic (a combination of gold and silver) systems that preceded it. With the gold-exchange standard of the 1920s and early 1930s countries could use the U.S. dollar and the British pound–both tied to gold–as well as gold itself, as reserves to back their currencies. Under the Bretton Woods monetary system, which emerged from World War II, all currencies were fixed to the dollar, and only the dollar could be converted to gold. Bretton Woods was another type of gold-exchange standard.

All of these previous standards collapsed, either because of war or because the systems’ rules weren’t adhered to.

The financial crisis that began in 2007 would never have happened had the Federal Reserve kept the value of the dollar stable. A housing bubble of the proportions that unfolded–not to mention bubbles in commodities and farmland–would not have been possible with a stable dollar. The Fed has also created a unique bubble this time: bonds. It hasn’t popped yet (nor has the farmland bubble), but it will.

The American dollar was linked to gold from the time of George Washington until the early 1970s. If the world’s people are to realize their full economic potential, relinking the dollar to gold is essential. Without it we will experience more debilitating financial disasters and economic stagnation.

What should a new gold standard look like? Representative Ted Poe (R-Tex.) has introduced an original and practical version. Unlike in days of old we don’t need piles of the yellow metal for a new standard to operate. Under Poe’s plan–an approach I have long favored–the dollar would be fixed to gold at a specific price. For argument’s sake let’s say the peg is $1,300. If the price of gold were to go above that, the Federal Reserve would sell bonds from its portfolio, thereby removing dollars from the economy to maintain the $1,300 level. Conversely, if the gold price were to drop below $1,300, the Fed would “print” new money by buying bonds, thereby injecting cash into the banking system.

An effective gold standard can be that simple. What gets lost in the discussion is that the yellow metal is merely a means of measuring the value of the dollar. The fact that a foot has 12 inches doesn’t restrict the number of square feet you can have in a house. The fact that a pound has 16 ounces doesn’t restrict your weight, alas–it’s simply a measurement.

The virtue of a properly constructed gold standard is that it’s both stable and flexible–stable in value and flexible in meeting the marketplace’s natural need for money. If an economy is growing rapidly such a gold-based system would allow for rapid expansion in the money supply. For example, in the 1950s and 1960s Japan’s economy grew 10% a year. The yen was fixed to the dollar, which, in effect, meant that it was fixed to gold. Yet the yen money supply mushroomed to fuel this boom.

The Poe bill’s basic operating gold-standard principle and its specifics provide plenty of grist for the discussion mill, which is all to the good. Monetary policy is a boring subject, but getting it right is absolutely crucial for our future prosperity and liberty.

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