World must abandon paper reserve currencies

Today's dollar has lost 85% of its value since 1971 and relative to gold that dollar has lost 96% of its purchasing power. The value of dollar has been decreasing over the years and the time will come when the world will need to abandon the paper reserve currencies.

By Lewis E. Lehrman
Sept. 26, 2011, 10:32 a.m. EDT
Market Watch

GREENWICH, Conn. (MarketWatch) — Federal budget deficits and balance-of-payment deficits have radically increased since World War II. Today’s dollar has lost 85% of its value since 1971. Relative to gold the dollar has lost 96% of its purchasing power.

But America has experienced sustained inflation and deindustrialization because of the overvalued reserve currency role of the dollar, overvalued relative to other paper currencies, especially the Chinese yuan USDCNY +0.19%.

While China is an important trading partner of America, it may also be a mortal threat. The Chinese economy is subsidized and sustained by the pegged, undervalued, yuan-dollar exchange rate. Neither the United States nor China seem to grasp the long-term, destructive consequences of the world dollar standard. The Chinese financial system has been corrupted by tyranny, deceit, and reckless expansionism. But, like America, China is destabilized by the perverse workings of the world dollar standard.

Only monetary reform, including an end to the reserve currency system, can permanently correct the American, Chinese, and global disequilibrium. Without international monetary reform, the perverse effects of the dollar reserve currency system will continually metastasize into one financial and political crisis after another — even on the scale of the Great Recession of 2007–09. Currency wars, protectionism, and social instability will intensify.

Currently, China holds more than $3 trillion of official reserves and more than $1 trillion in U.S. government securities. These Chinese dollar reserves, earned by export surpluses, directly finance the American federal budget and balance-of-payments deficits. China has chosen to hold a significant fraction of its export surplus in the form of official dollar reserves. These dollars are promptly re-deposited in the U.S. dollar market, where they are used to finance U.S. budget and balance-of-payments deficits.

The reserve currency system of the paper dollar, whereby Chinese surplus dollars are reinvested in the United States, ignites inflation by multiplying purchasing power in China and the U.S., without associated equal production of new goods and services during the same market period. Thus, total spending, or purchasing power, exceeds the total value of goods and services at prevailing prices. When total demand exceeds total supply, the price level must rise.

The “exorbitant privilege” of the dollar is matched by the insupportable burden of America’s overvalued reserve currency role, which since World War II has tended to deindustrialize the United States. The official dollar reserves held by China amount to a massive mortgage on the work and income of present and future American citizens, gradually increasing social inequality by reducing the standard of living of lower- and middle-income families, even while the banker, speculator, and governing class is enriched.

The Fed’s response is to depreciate the dollar in the hope of eliminating the balance-of-payments deficit — by becoming more competitive abroad as America becomes poorer at home. The perversity of the official reserve currency system is endless.

Ultimately America, must choose between two options:

1.) The United States can wait for the eventual demise of the world dollar standard under chaotic conditions.

2.) Or, America could take the lead in reforming the official reserve currency system based on the dollar.

Such a monetary reform program would entail a careful windup, by agreement, of the world dollar standard. At the same time, America would reestablish by statute a dollar convertible to gold, i.e., a dollar defined in law as a weight unit of gold. Gold would replace the dollar as the world’s reserve currency. The reform would, first and foremost, establish a tested, non-national, impartial monetary standard as the basis of a stable dollar — one which reasonable sovereign trading partners could accept. Gold would become the international settlements currency, replacing the dollar as the basis of world trade and finance. Inasmuch as monetary history shows that no unstable national currency can permanently serve as the crucial world reserve currency, it follows that neither can an unstable basket of national currencies, nor can a fiction such as the SDR.

After the failures of several generations of unhinged paper-credit currencies, pegged and floating exchange rates, America should embrace a stable monetary system tested in the laboratory of human history — the cornerstone of which the elites have rejected for a century. It is time to restore the true gold standard, shorn of the economic pathology of official reserve currencies. It is time to restore the American monetary standard anticipated by the founders in the Constitution. What the Founders learned from the paper money inflation of the Revolution, the recent past has taught us again.

America and the world need a monetary standard which, unlike the paper-credit dollar, cannot be created at zero marginal cost with which to subsidize the U.S. government and insolvent financial institutions at near zero interest rates.

For America to establish the gold standard would provide the least imperfect monetary solution to the problems of a century of financial disorder.

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Plan To Return America To The Gold Standard Set To Be Offered at Washington

Lewis Lehrman and others are planning on presenting a five-step plan to return the United States to a sound money system at a conference in Washington. This plan includes returning the United States back to the gold standard within 5 years.

September 26, 2011
By SETH LIPSKY
NY Sun

NEW YORK — The next big step in the gold standard debate is going to be taken next month at Washington, when one of the original members of the Reagan-era United States Gold Commission offers a five-step plan to return America to sound money.

The architect of the plan, Lewis Lehrman, a businessman and scholar, will present his program in an address October 5 at a conference in Washington on the how to return to a stable dollar. He will outline a five-step program to return America to a gold-backed currency within five years.

What is significant about the event is its aim of shifting the discussion to practical steps that could be taken to rescue the American monetary system. It comes as the value of the United States dollar has collapsed to record lows, sinking at one point this month to less than an 1,800th of an ounce of gold. The value of the dollar has recovered marginally in recent days, but still lurks below a 1,600th of an ounce of gold, a level that would have been nearly unimaginable — at least in policy terms — as recently as the start of President George W. Bush’s first term, when the dollar had a value of a 265th of an ounce of gold.

“The stand-pat defenders of today’s paper-dollar system turn back every argument in favor of the gold standard by claiming that there’s no practical way to re-establish it,” says the editor of Grant’s Interest Rate Observer, James Grant. “What Lehrman has done is to devise a practical and persuasive plan to do just that.” He predicts “the ball is now — or soon will be — in the paper-money court as it has not been for a long time.”

In recent months, a growing chorus of serious observers have started to speak in favor of the restoration of a link between the dollar and gold. Some of them have been establishment figures, such as the president of the World Bank, Robert Zoellick, who in November last year startled the debate by issuing in the London Financial Times an op-ed piece suggesting there might be a role for gold in a reformed monetary system.

Since then a number of the nation’s most respected journalists — led most notably by Mr. Grant — have come out publicly for a return to the gold standard. Mr. Grant’s demarche came on the op-ed page of the New York Times. Several Republican candidates for president, ranging from Congressman Ron Paul to Congresswoman Michele Bachmann and Governor Perry, among others, have signaled that they view that the restoration of a sound dollar as being a component of returning America to the path of economic growth and full employment.

Mr. Lehrman, however, is the first of the leading figures in the debate to step forward with a plan, which he is expected to lay out in the Washington conference on a stable dollar. The conference is being hosted by the Heritage Foundation think tank. Mr. Lehrman’s plan is elaborated on at length in a book his institute will publish next month called, “The True Gold Standard: A Monetary Reform Plan Without Official Reserve Currencies.”

Although Mr. Lehrman was once a member of the United States Gold Commission, the plan he will announce next month has no official status. But when Mr. Lehrman was with the Commission, he co-authored with Dr. Paul a famous dissent, which made the case for gold and has been widely consulted in the decades since the Commission majority made its recommendation to continue with a system of fiat money, which in turn, advocates of stable money argue, culminated in America’s current travail.

The first step Mr. Lehrman will speak of in Washington would be for America to announce the “unilateral resumption of the gold monetary standard” at “a date certain,” as Mr. Lehrman put it to earlier this month in a wire to The New York Sun. What Mr. Lehrman means is that the U.S. dollar would “be defined by law as a certain weight unit of gold” and the “Treasury, the Federal Reserve, and the entire banking system” would be “obligated” to “maintain the gold value of the dollar.”

Mr. Lehrman foresees a transition in which, on the date that Congress authorizes the resumption of unrestricted convertibility between dollars and gold, Federal Reserve Bank notes and American dollar bank demand deposits would be “redeemable in gold on demand at the statutory gold parity.”

Step two in the Lehrman Plan would be the minting by the Treasury and authorized private mints of what Mr. Lehrman calls “legal tender gold coin in appropriate denominations, free of any and all taxation.” The taxation point is a key one. Currently, if the value of the dollar collapses while one is holding gold coins, one can be taxed when one spends those coins.

That the act of spending exposes one to a tax is a controversial feature of the current system of fiat money. So intense have been feelings on the point that a movement to remove state-level capital gains taxes on gold coins has already begun in the states. Utah was this year the first to formally take such a step.

The third step Mr. Lehrman will propose at Washington is an international monetary conference that would, as Mr. Lehrman sketches it, “to provide for the deliberate termination of the dollar-based official reserve currency system and the consolidation and refunding of foreign official dollar reserves.”

He reckons that the international agreement to be negotiated would “inaugurate the reformed international monetary system,” or what he calls the “multilateral currency convertibility to gold, without official reserve currencies.”

Step four would be the establishment by the conference of gold as “the sole means by which nations would settle residual balance of payments deficits.” The idea would be to designate gold, “in place of reserve currencies, as the sole official monetary reserve asset.” Once official foreign currency reserves were consolidated and refunded, Mr. Lehrman argues, “[s]table exchange rates would result.”

Finally, the fifth step would be that so-called “floating” and “pegged-undervalued exchange rates,” as Mr. Lehrman terms them, would go out of use, and the “reformed international monetary system would establish and uphold stable exchange rates and free and fair trade — based on the mutual convertibility to gold of major currencies.”

One headwind Mr. Lehrman’s plan might face is any sign that value is starting to flow back into the dollar. In recent days the value of the dollar has risen somewhat, though not by a large amount in percentage terms. If the trend continues, it is possible it could take some of the steam out of the movement for monetary reform.

This is one of the reasons momentum fell away from monetary reform at the start of the Reagan administration. Even while the Gold Commission was meeting, the new chairman of the Federal Reserve Board at the time, Paul Volcker, was putting in place the regime that defeat the great inflation into which the country had been plunged in the 1970s.

The conference in Washington, however, is pursuing a strategy designed to get past the question of which way the dollar is moving at any given moment to the question of what many believe to be the paramount principle, namely the stability of the dollar in terms of gold. That is, its usefulness as a measure of value. Mr. Lehrman stresses that a true gold standard is as effective in preventing deflation as it is against inflation, a point that may become central, if the value continues to flow into the dollar.

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